What Qualifies

IRC §1256, “Section 1256 contracts marked to market” sweeps in five categories under IRC §1256(b)(1): regulated futures contracts, foreign currency contracts, nonequity options, dealer equity options, and dealer securities futures contracts. Only the first and third matter to an individual investor.

A nonequity option is defined in IRC §1256(g)(3) as any listed option that is not an equity option, and IRC §1256(g)(6) defines an equity option as one on stock or on a narrow-based security index. “Narrow-based” is not a judgment call: the statute borrows the securities-law test in 15 U.S.C. § 78c(a)(55)(B) — nine or fewer component securities, or one component above 30% of the weighting, or the top five above 60%. Read those together and the line falls out: a listed option on an index that fails all three of those tests — a broad-based index — is a § 1256 contract, while a listed option on a single stock or on a narrow-based index is not. In practice that means cash-settled index options — SPX, XSP, NDX, NQX, RUT, RUI, DJX, OEX, XEO, VIX — are § 1256 contracts, as are all futures and options on futures.

What is not a § 1256 contract matters just as much:

Options on ETFs

SPY, QQQ, and IWM are securities in their own right, not broad-based indices, so options on them are equity options taxed under § 1234 — even though they track exactly the same indices as SPX, NDX, and RUT. Same exposure, different regime.

Single-stock futures and options on them

Excluded by IRC §1256(b)(2)(A) unless you are a dealer.

Swaps

IRC §1256(b)(2)(B) expressly excludes interest rate, currency, basis, commodity, equity, equity index, and credit default swaps, along with caps and floors. They are taxed as notional principal contracts instead; see section “Taxation: Notional Principal Contracts”.